Italian Election Outcome Sparks Selloff

A general election has left Italy with no clear winner. WSJ's Chris Emsden suggests that even a grand coalition of the major parties would prove unworkable, making another election more likely. Photo: Reuters

By

Sara Sjolin and

Nina Bains

Updated Feb. 26, 2013 2:32 p.m. ET

European stocks slumped and Italian yields spiked on Tuesday, as inconclusive Italian election results fueled fears of political instability.

Italian government bond yields soared to their highest levels since late November.

The euro fell and European stocks tumbled Tuesday. But most concerning is the return of euro-zone contagion, as the borrowing costs of Italy and other debtors start to rise again, says Dow Jones's Katie Martin.

Voters gave the thumbs down to austerity measures, with former Prime Minister and market favorite Mario Monti securing less than 10% of the vote, while antiausterity populists on the left and right performed strongly. While the center-left coalition won the Lower House by a thin margin, no clear majority triumphed in the Senate.

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"At the very least, a prolonged period of uncertainty faces the Italian economy, affecting investor sentiment. In coming months, fiscal slippage and obstacles to structural and labor market reforms would not at all be well received by global investors," said Andrew Milligan, head of global strategy at Standard Life Investments,SL.0.55% in emailed comments.

European banks tumbled. The Stoxx 600 index for the sector ended down 3%, led by Italian lenders. Intesa SanpaoloISNPY1.84% slid 9.1% and UniCreditUNCFF1.49% fell 8.5%. Italy's market regulator intervened in a bid to quell volatility by temporarily suspending short-selling of shares in Intesa Sanpaolo.

Italy's 10-year government bond yield soared 0.52 percentage point to 4.88%, while the corresponding yield on Spain's bond also jumped, rising 0.24 percentage point to 5.34%. Sentiment was further eroded after an auction of short-dated Italian government bonds saw borrowing costs leap to a four-month high. This bodes ill for Italy's auction Wednesday of up to €6.5 billion in longer-dated bonds.

"The possibility of bond purchases by the European Central Bank might stop [bond] yields rising back to or above the supposedly critical 7% threshold," said Ben May, European Economist at Capital Economics. "Nonetheless, given the particularly bleak economic backdrop for Italy and the growing risk that the next government will at best have a limited mandate to continue the reform process begun by Mario Monti, we would not be surprised if a sustained bout of market pressure were to force Italy to eventually to request some form of support package [from the European Central Bank]."

The euro was more composed, trading within a tight range. The common currency was at $1.3059 Tuesday afternoon in New York, from $1.3062 late Monday.

In the U.S., Home DepotHD0.49% rose 5.4%, leading a rebound in the Dow Jones Industrial Average one day after the year's largest drop, as Federal Reserve Chairman Ben Bernanke signaled stimulus policies would continue.

Upbeat U.S. data failed to lift the mood in Europe. New-home sales posted the biggest monthly jump in nearly two decades last month, reaching the highest level since mid-2008. Separately, U.S. home prices improved in December, reversing declines in November, according to the S&P Case-Shiller 20-city home prices index.

In European corporate news, shares in French telecommunications company VivendiVIVHY1.58% retreated 1.8% after reporting a drop in full-year 2012 profit and as it warned that its French telecoms unit, SFR, would likely weigh again on results this year.

Building-materials supplier CRH advanced 2.2% after the company maintained its dividend while also targeting further cost reductions.

Engineering group GKNGKNLY-0.81% rose 3.6% as it posted a 68% rise in pretax profit during the full year-end, achieving record profits in all four divisions.

Among commodities, light, sweet, crude for April delivery fell 71 cents to $92.40 a barrel on the New York Mercantile Exchange. Most actively traded gold for April delivery on the Comex division of Nymex rose $28.90 to $1,615.50 a troy ounce.

Corrections & Amplifications Yields on 10-year Italian bonds jumped to hit their highest level this year on Tuesday. A previous version of this article said they were at their highest level in a year.

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